Non-compete clauses: Room for improvement, but not inherently evil - Opinion
Source: Straits Times
Article Date: 30 Apr 2024
How can companies use them in a way that strikes a better balance between their interests and those of their workers?
Non-compete clauses: Whether you are a junior white-collar worker or a senior high-flier, they can seem like traps that may blow up in the future. You hesitate for a second when you see them in the employment contract that has been placed before you, but end up signing anyway.
These restrict an employee from joining their former employer’s competitors, poaching their customers, divulging commercial secrets, or luring away former colleagues, immediately after leaving their present employers.
Figures in Singapore are hard to ascertain since there is no central registry of employment contracts, and with only a handful of cases going to court. In the US, about 18 per cent of Americans work with a non-compete agreement while 38 per cent have signed at least one in their career, according to the US Treasury.
Naturally, such clauses are unpopular with employees, who bemoan having fetters placed on their freedom of employment.
The tide of public opinion is also moving against employers who bind their employees to non-compete clauses, as the Ministry of Manpower aims to roll out guidelines on non-compete clauses.
The problem with non-competes
Employers sometimes shoot themselves in the foot by inserting overly broad clauses in the mistaken belief that it is best to cover all their bases.
Take Singapore personal finance platform MoneySmart as an example. It recently failed in its legal bid to stop a former executive from working for a rival firm on the basis of a non-compete clause.
The High Court held that the non-compete clause was unreasonable because of the wide scope of prohibited activity, geographical area covered and uncertainty as to the length of the period of restraint.
The High Court also recently dismissed a bid by e-commerce firm Shopee to prevent a former senior employee from joining rival ByteDance, which operates TikTok Shop. The employee was bound by a clause forbidding him from working with any competitor within 12 months of leaving Shopee.
The court had serious doubt as to whether the restraint was reasonable. Although the employee was working only for Shopee in Brazil, the non-compete clause extended to other markets for which the employee had no duties or any specific information about.
How reasonable are non-compete clauses?
Non-competes appear to go against the principle that workers should be empowered with greater career mobility, in an era of disruption and with the acceptance that they will likely take up multiple jobs in their lifetime. At a time when workplace relations are in a flux, and as reflected in how Singapore authorities are weighing in on flexible work guidelines and an anti-discrimination law, the debate over non-competes opens up yet another front in labour relations.
Here, it is tempting to jump on the bandwagon and blithely denounce employers who use non-compete clauses as bad actors. However, non-compete clauses may not be as evil as they are made out to be.
In a 2016 report, the US Department of the Treasury suggested that non-competes solve a “hold-up” problem: by preventing a worker from taking trade secrets to a competitor, the employer would be more willing to share such vital information with employees, which would raise workers’ productivity.
Non-competes may also further incentivise organisations to invest in employee development and training, US academics Jonathan M. Barnett and Ted Sichelman have suggested in a 2020 paper. This is especially since employers can reap the benefits of such investments over a longer period without worrying about workers jumping ship to a competitor.
While such thinking may come across as calculative, or even mercenary, it is unrealistic to assume that employers would be just as motivated to train employees who are likely to walk out of the door the very next day.
Besides, job seekers have choice and agency. They can seek legal advice – whether by consulting a lawyer or even at a free legal clinic – on the enforceability of their non-compete clauses. They can also negotiate down their scope, as a non-compete is a contractual term just like those governing their pay, bonus or job scope.
As a last resort, job seekers are free to turn down job offers that come with unfair clauses, especially if they have other offers on the table – and employers generally seek to impose non-competes on sufficiently skilled workers who would hopefully have other options.
When non-compete clauses can hurt employers
If anything, recent cases suggest companies should be wary of aggressively imposing expansive non-compete clauses in the vague hope of latching on to otherwise mobile staff.
Suing to enforce non-competes is time-consuming and eats up energy and resources, especially with the burden of proof on the employer. The act of suing an employee may also damage the organisation’s reputation.
Worse, if the court decides that the non-compete is unenforceable, the entire exercise would turn out to be expensive but useless. And if the employer decides not to enforce the non-compete, then the incorporation of such clauses in employment contracts in the first place ends up being pointless.
Just look at the Lazada case in January, where hapless employees retrenched by the e-commerce giant found themselves still subject to 12-month-long non-compete clauses. The extensive list of employers they were prohibited from working for ranged from tech to retail to logistics companies. The matter was put to rest after a settlement was reached between the National Trades Union Congress and Lazada.
Workers may well hold more bargaining power than they think, and should not simply assume that nothing can be done about the non-competes they are ostensibly bound by.
The news also illustrates how employers who use non-competes indiscriminately may end up creating problems for themselves in the future when the employee is fired, resigns or retires.
Striking the right balance
Given the downside of misusing non-competes, companies should consider how to use them judiciously, and strike a delicate balance between protecting their interests and not unfairly undermining the legitimate rights of workers seeking fresh employment. This is not easy, especially since there is no one-size-fits-all approach or a “standard” non-compete clause.
Even when two different employees are subject to the exact same non-compete clause, it may be enforceable against one but not the other. For example, a non-compete which prohibits a worker from poaching the employer’s customers in Malaysia may well be enforceable against an employee who had dealt with and had relationships with customers there, but would be less likely to be enforced against another employee without any dealings with Malaysian customers.
Nevertheless, employees should not be emboldened into thinking that all non-competes can simply be ignored.
In a 2018 decision, the High Court upheld a two-year non-compete which prohibited an employee from dealing in cement products. The employee in question had quit a Japanese commodities corporation, took up a job with a competitor, and then proceeded to set up his own business.
The court found the non-compete to be reasonable since it was limited to the cement industry, a specific area of business that the employee had been involved with. It was not a blanket prohibition against working in any part of the commodities industry.
Further, the employee was restricted from dealing in Vietnam and the Philippines, which was unobjectionable as these were countries that he had actual and significant customer contacts in.
Finally, the temporal scope of the non-compete – two years – was upheld as the employer would require that amount of time to allow the employee’s replacement to try and rebuild customer contacts.
The case underscores the point that for non-competes to be effective, they must be drafted in a manner bespoke to that particular employee and their industry.
Finally, and for completeness, non-competes are not the only contractual mechanism by which employers can safeguard their interests.
Employers are free to utilise confidentiality clauses to protect their confidential and proprietary knowledge. They would do well to stop viewing non-competes as the only arrow in their quiver.
A better way
Using non-compete clauses comes with a price. Anecdotally, companies who insist on such clauses tend to face more challenges hiring, especially for high-level or strategic roles, and when dealing with senior and sophisticated candidates who may not be prepared to accept such restrictions.
Ironically, non-competes may even undermine the goal of retention, as their use risks prodding employees into viewing the employment relationship as a transactional or even adversarial one.
The law on non-compete clauses will continue to evolve, and the present legal position will not remain static. In the US, the Federal Trade Commission has just barred non-competes (although this will be subject to challenge). Closer to home, the courts will likely continue to explore and clarify what exactly constitutes reasonable restraints in a variety of industries and roles.
Meanwhile, the Ministry of Manpower and its tripartite partners are finalising guidelines on non-compete clauses, to be released in the second half of 2024.
One hopes that the guidelines will shed more light on Singapore’s legal position, address the present information asymmetry between employers and employees, and improve the bargaining position of employees.
Employers should watch this space carefully and stay up-to-date with legal developments.
And as for employees, gone are the days when they had no choice but to suffer unreasonable non-compete clauses in silence. Instead, they can and should educate themselves on their rights, and push back where necessary to protect their interests.
- Khelvin Xu is a director specialising in disputes at boutique firm Covenant Chambers LLC.
Source: Straits Times © SPH Media Limited. Permission required for reproduction.
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